In this Rule Breaker Investing podcast, host David Gardner makes his monthly dive into the correspondence files to talk back directly to his Foolish fans, and to share some of the more interesting stories with his audience. This time around, he'll kick things off by revealing The Motley Fool's new motto, and explaining why they devised it.
Then, it's into the details, with dives into how one can properly value internet rule-breaking companies, investors who were inspired by the market cap game, a callback to the 25 questions used to rate stocks' risk level, a new variation on the "adding to your winners" strategy, and many other topics.
A full transcript follows the video.
This video was recorded on Sept. 26, 2018.
David Gardner: Welcome back to Rule Breaker Investing! I'm delighted to have you with me.
If you are a regular, longtime listener, then you know what we're about to do here. It's the last Wednesday of the month of September 2018 and that means it's time for what we do every last Wednesday of every month -- and have done for years, now, on this show -- and that's your mailbag.
That's right. You write me at RBI@Fool.com. That's the email address most of you have learned to use. You might also tweet us at @RBIPodcast. I read through your questions. Your stories. Your [surmises]. Your humor. I love it. I really enjoy reading these. I've always read every single note ever sent to us, and it's only with sadness that I let you know that I can't ever share all of them on any show because we have too much to share from Mailbag, but we always read them. Thank you!
And then I talk to the ones that seem most interesting and most relevant to the most Fools. The greatest good for the greatest number. I believe that's the utilitarian philosophy that I think I studied in college at some point. Was it Jeremy Bentham I'm going to go with? Anyway, the greatest good for the greatest number. That's kind of how we roll with the RBI Mailbag. So yes, that's this month and, as usual, I've got queued up a bunch of points. Lots of fun stuff to talk through.
Before we get there, though, I want to mention something that's changed -- that's changed for The Motley Fool in the last 10 days. It's just kind of a fun thing. I love always to share out what we're doing here at The Fool, and I assume that at least half of you would be interested in this. I hope you are.
We changed the purpose of our company in just the last 10 days. Now, it's not something that came impulsively to my brother Tom, our CEO, and me. Nope. We talked about this for a while. We went through a process, talking it out with a lot of our fellow Fools, and we finally arrived at a new phrase.
So if you're a longtime Fool junkie [and darn it, I sure hope you are], then you may have realized that The Motley Fool's purpose, until about 10 days ago, for the last eight years was "Help the World Invest -- Better." And that's definitely always going to be what a lot of us are doing at The Motley Fool.
However, The Fool has gotten a little [more] motley. We've broadened a little bit. We have some things that aren't just focused, let's say, on Rule Breaker Investing, even though my full-time focus is right here with you. Picking stocks for Stock Advisor and Rule Breakers. The Motley Fool is starting to do some other things. We have a venture cap fund. We have a lot of interesting irons in the fire.
I hope you visited The Ascent, which is the TheAscent.com, as in ascent up a mountain. That ascent. That's for people who are looking to find a better credit card or maybe a better mortgage. And so we're doing an increasing number of new things.
So we thought about what should now be the purpose of The Motley Fool, and here it is. I'm going to share it with you straight up. It's to "Make the World Smarter, Happier, and Richer." And I love that phrase. And in part I love it because it hails back to the original three words that we launched with on AOL [Keyword: FOOL] back in the day.
And I know some of you listening right now were right back there with us back in the day, but you may remember that we would say, "Keyword FOOL. Welcome to Motley Fool Home Page to educate, amuse, and enrich." And we've used that phrase over and over. We continue to use it to this day. Sometimes you'll see it in marketing materials. Sometimes you'll see it on a t-shirt. A mug. "To educate, to amuse, and to enrich."
And if you think about what the world looks like that gets educated, that gets amused, and that's get enriched, I think it's a world that's smarter, happier, and richer. And when I think about Rule Breaker Investing, this podcast, I think we're very aligned in this podcast with The Motley Fool's purpose, so I won't belabor the point any further. I definitely want you to know the latest news.
We tend to change these things maybe once a decade, so you can expect you're going to hear a lot more from me, and that phrase, and from our company because that's where we're all aligning now in thinking about what we can do with the day-to-day work that we do on behalf of you and people worldwide.
We want to make you smarter. On this podcast I want to make you happier. We play game shows on this podcast. I want to make you richer. I pick five-stock samplers for free on this podcast. We talk all the time, of course, about how to invest better in every aspect of your life: in your investing, in your business or professional life and, of course, in life itself. Invest! Making the world smarter, happier, richer. Welcome to Rule Breaker Investing!
Well, as I've taken to doing in recent months, I'm going to start this month's mailbag with some hot takes straight from Twitter. Just reacting to some of the fun and interesting tweets that I saw.
The first one's from Austin Lieberman. Austin, you sent this @AustinLieb on September 14th. "How can these types of companies even begin to be 'valued' by outdated Wall Street metrics?" Austin asks. And he basically points, in his tweet, at a message from the CEO of Shopify (NYSE:SHOP), Toby Lütke [Tobias Lütke] who sent this from his Twitter account.
He wrote [this is a few weeks ago, now], "We moved all of U.S. East Coast Shopify stores to U.S. Central as a precaution for Hurricane Florence. This was done automatically with zero downtime." That was the quote. That was the tweet from Toby Lütke, the CEO of Shopify.
I think what he's saying there is, "Well, these are virtual stores. These are internet, e-commerce-based stores that Shopify is managing," so I take it to mean that they were able to use the cloud and copy and paste all of their East Coast servers in the Shopify stores they're helping power, and they pushed those over to the Central part of the U.S. in order that Hurricane Florence wouldn't disrupt business.
Anyway, that's my take on it. Thank you, Austin! That, again, is from the CEO of Shopify, one of our outstanding performers for many Motley Fool members and a two-time pick in Motley Fool Rule Breakers. My brother has helped a lot of people find that in his services, as well.
And you're right, Austin. You really can't value that kind of thing. That doesn't show up in a balance sheet. It doesn't show up unless you look really hard, maybe, at the income statement if somebody says, "I want to do more business with a company that treats people that way."
It's really hard to quantify vision but, darn it, that's how Rule Breaker Investing works, my friends; because in part, we're looking at the intangibles. We're using the right side of our brains and we're thinking about what Wall Street isn't looking at or maybe caring about. And people, and CEOs, who truly care [who deeply care and make this world better], it turns out they often are behind winning stocks over the long term. They're good people doing good things in this world. Great point, Austin! You're right. It really isn't possible to work that into a valuation metric and, yet, that's a real part of the value of companies like Shopify and their leadership.
A few more hot takes. These two speak to The Market Cap Game Show, which I played earlier this month with my good friend Matt Argersinger, and I really love these tweets. They both kind of say the same thing and I'll explain in a second why I love them.
The first one comes from @skye -- that's with an "e" on the end, like the Isle of Skye, which is a beautiful place to visit -- @skyecam, who wrote, "I'm personally glad @MArgersinger..." That would be my friend Matt. "I'm personally glad Matt missed ETSY in Episode 1 because it showed what a great value it was so I doubled down! #ThanksMatt but #ILostToMatt every time."
And then Chris Jones, @ChrisM_Jones, tweeted, "#IGotEtsy. Thanks @MArgersinger. I bought it after we both overestimated its market cap the first time. Awesome game and a great way to think about investing. #IStillLostToMatt."
Well, a couple of themes run through those. First of all, it's very hard to beat Matt at this game. That's because Matt is an aspiring Hall of Famer, and I'm always going to bring the best to this show. I'm not here for mediocrity. I'm about to welcome in one of my favorite UI, techie minds to answer a couple of questions coming up; my good friend Greg Robleto. He's great. Greg is great. My producer Rick is great. I hope you've gotten to know that. We're all about greatness on this podcast. That's why we have Matt Argersinger come to the microphone to play The Market Cap Game Show.
But really the main point I wanted to make, here, is that both of these listeners in real life went and bought Etsy stock because they heard Matt dramatically overestimate and miss his guess on what its market cap was.
I'm going to make this up, but let's say Etsy's market cap was like $1.5 billion and he was guessing $4 billion. And at the time I said, "Hey, Matt. If you thought it's worth $4 billion and it turns out it's less than half that, doesn't that sound like an undervalued stock that you might want to buy?" And I think Matt would tell us [I think he did] that he didn't actually buy it. But darn it, @skyecam and @ChrisM_Jones did, and it is up more than 100% since that first Market Cap Game Show, so I love those tweets.
And then the last one -- just a little bit of humor -- @Willy1Moe, one of my favorite ongoing correspondents to this show talking about optimism, something I talked about earlier in the month. And he said, "Some more great insight." His tweet read, "Every time I hear the word 'optimist,' it reminds me of Stephen Wright's joke." Stephen Wright, the comedian. Here it is. He wrote, "I put my application in for the Optimist Club, but I don't think I'm going to get accepted." #cheers
Thank you Willy1Moe! Thank you for another fun month of tweets! A lot of them generated by The Market Cap Game Show with some #IBeatMatt. Mostly #ILostToMatt.
We also had a five-stock sampler this month, and if you missed that Mmm-mmm Good I hope you'll take a look at it because I picked five stocks for you for free. Stocks that I expect to outperform the market over the next three years. That's another thing we do on this show.
Mailbag Item No. 1: This one is about market caps at Fool.com. And I've already pumped him up a little bit -- I've already mentioned him -- my friend Greg Robleto. Greg, thank you for joining us, here, on Rule Breaker Investing!
Greg Robleto: David, thank you for having me!
Gardner: Now, I want you to answer a question in a sec about market caps on our site and I think I have one more question after that, for you, but this is your debut on Rule Breaker Investing. Is that right?
Robleto: This is, yes.
Gardner: So I want to start by asking -- you came to The Motley Fool -- what year did you come to The Motley Fool?
Gardner: Outstanding, so 12 years ago. I remember my early interview with you as a new employee. You were talking about some background in Delaware and Shakespeare, and even though you do UI design, and are a semi-techie and sometimes I'm not aware of what the differences are between these things [but I know you're both], you also have lots of other facets. Could you briefly share with us just your Delaware/ Shakespeare background?
Robleto: Sure. Thanks, David! Yes, I am a UI designer and developer by day, but for years [especially when I lived back up in Delaware before I moved to this area, joined The Motley Fool], then I helped start up a Shakespeare company in Northern Delaware; the Delaware Shakespeare Festival. It's been shortened, now, to Delaware Shakespeare because they do much more than just the single, summer festival now. It has been going strong for about... What now? About 15 years or so.
Gardner: That is outstanding!
Robleto: Yes. It's a wonderful opportunity to see Shakespeare under the stars for the people in Northern Delaware. I was so happy just to see how it has grown and grown over time.
Gardner: Is there a bust or something of you as the founder that I pass by on the way to my seat under the stars watching As You Like It?
Robleto: You often find me, up there, shaking hands and saying hello to people as they go to their seats, there. I try and go back up for it every summer.
Gardner: That's awesome! I think a lot of our listeners know that every one of our employees is encouraged to state their Motley. That's one of our core values, here, at The Fool. It's kind of the value that you bring -- that you uniquely bring -- to our workplace, because in your case you're Greg Robleto. Greg, what is your Motley?
Robleto: My Motley is "Explore." There is always a way. I generally find this helps me through either development, as I'm trying to get through code and figure out how to actually put the site together, or design, as I'm trying to figure out how to serve the members for the needs of what they want to do. Or serve the business needs. There's always a way. I just need to find it.
Gardner: That is awesome! Thank you for 12 great years and let's go for 12 more!
Robleto: Thank you, David!
Gardner: Let's go to Lou Miller's question. Greg, he starts, "Hi, David!" Let me say Lou is a fan of The Market Cap Game Show. He says, "It's an entertaining way to learn more about the role of market caps in making investing decisions."
Lou goes on. "I've been aware of my stocks' market caps before but, frankly, had not thought about them in a Foolish way until you began The Market Cap Game Show with Matt some months ago. Now I am acutely aware of market caps and take it into consideration in making allocation decisions among others." Good on you, Lou! I'll keep going.
"However, now that I'm more focused on the market caps, I've noticed that The Motley Fool's market cap data occasionally does not line up with that of other market data providers such as Yahoo! Finance and Google Finance, and this seems especially true with some small-cap stocks."
Lou goes on. "For example, on The Motley Fool Scorecard Appian has a cap of $867 million but Google Finance has it at $2.2 billion." He gives a few other examples. "Does it have something to do with the number of shares floated vs. the number outstanding and, if so, why would some use floated while others use outstanding or is it something else?" Greg Robleto, help us out here. What's going on with market caps? Not all of them, but some of them, look a little messed up on our site.
Robleto: Oh, you are so right, Lou, and thank you, David, for giving me a chance to talk about this. I have been chasing this down, I feel like, for the better half of this year. One of the things that has really changed, I think, is that a lot of newer companies are now doing a dual share class with the public/ private shares and our data provider is only giving us back the public share information, not the private share.
For stocks like Yandex, or Stitch Fix, or MongoDB, or Appian, we are only getting back the publicly tradeable share number and not the number we're looking for [the number we think of as the market cap], which is the total number of shares.
We're working with our data provider to figure out if this is something that we can resolve, and so one of the things that my team has been doing across the UI of the site is just putting up an NA when we think we're giving the wrong information. So if you're in the Rule Breakers site or Stock Advisor site, we now have it if you're looking at Stitch Fix, there's an NA, there, because we know we're giving you the wrong information.
But Lou, I think you're talking about the personal scorecards, and those are still one I'm working on tracking down and making sure that we NA the right things out of that one, as well, so that when you're looking at your stocks, you're not seeing incorrect market cap information.
Gardner: Awesome! Thank you, Greg! You know, there are a ton of numbers in investing. I just think about one company's 10-K, let alone all the 10-Ks and all the things. I know we're always aiming for 100% accuracy. I don't think we've hit it. I'm not sure any site on the internet does, but I really do appreciate all of Greg's work to make it accurate 99.9% of the time and then I appreciate people like Lou who for the other 0.1% say, "Hey guys, what's going on?" So thank you, Greg. Will you hang with me for one more?
Robleto: Sure, I'd love to!
Gardner: Excellent! Mailbag Item No. 2: This comes from Todd Niemann. He simply says, "Hello, there. A while back you shared your 25 questions for risk rating stocks on this podcast. I was trying to look online, but I could not find those questions. Could you please send me the list? Love the show. Keep up the great work. Thanks." Todd Niemann. Well, thank you Todd!
So Greg, I really enjoyed doing that series. I spent three consecutive weekly podcasts and broke down all 25 of those questions so that my fellow Fools understand at least how I like to look and think about risk. Like what's the risk of me losing money on this stock? That to me is the risk we're guarding against.
Our rating system, which I think a lot of our listeners know, is zero to 25. The higher the risk rating, the higher the risk, so a stock with a 19 risk rating is a lot riskier with a lot greater chance of losing your money than a stock with a nine risk rating. Now Greg, this is something that we do have in at least one special place on our website.
Robleto: Oh, yes! Well, first you can find those podcasts on Podcast.Fool.com. They should be in the archives, there. I would hope so. I remember listening to them. They were great to listen to and go through all 25 steps.
Gardner: Well, thank you! Greg, did you help build that portion of our podcast center?
Robleto: I did. I did.
Gardner: Excellent! Your handiwork is all over this podcast and our site, which is not surprising. So you're right. Presumably somebody could google "rule breaker investing risk ratings." Maybe "David Gardner." They're going to find a link to listen to those podcasts.
Robleto: I sure do believe so, and I think we're working on even getting their transcripts down the road, as well, if we can have that available, too.
Gardner: That would be awesome!
Robleto: But you know what else? We were talking about the risk rating. We have the application of the risk rating on individual stocks, and that's within the premium services. So on the Rule Breakers service, if you go into Rule Breakers from the new top nav, it says, Performance, and it gives you a list of all the stocks that are actually Rule Breakers, and then we give you the name, and we give you the price, and one of the columns is risk rating and it just lists right down there. You can sort it. You can click through on it to learn more about the breakdown of the 25 for any of the stocks that are in the Rule Breakers service.
Gardner: Beautifully said, Greg. And do I feel some product placement coming on, which we don't do that often? I think that I do. I think Todd Niemann, if he's not already a Rule Breakers member or a member of Motley Fool Stock Advisor, Todd and anybody like him; yup, we've got risk ratings, as Greg just mentioned right there in your premium service on the pages that Greg referred to. So, join RBI.Fool.com. All the things. All the risk ratings and mostly accurate market caps. Greg, thank you very much and Fool on!
Robleto: Thank you, David!
Gardner: Mailbag Item No. 3. This one is from Charles [Buehle] writing in from, you betcha, Botswana. Hello, Charles [Buehle], and thank you very much for taking the time to write. He was reflecting on what we talked about in last week's podcast, and that's "The 6 'Hows' of Rule Breaker Investing." And I said, flat out on that podcast, "This is putty in your hands. This is draft material. I'd love to hear back from anybody who thinks they can top it. Subtract from it. Add to it."
Well, Charles had an addition, and I am tempted to add this. Ultimately, I don't think that I'm going to, Charles. I love the idea, but it takes away from the parallelism that I have established with the six traits of a Rule Breaker company and the six hows of a Rule Breaker investor. I like how it's six and six, but I kind of love what you did with this one, so I definitely want to share it.
Charles wrote, "Hi, David. Great episode summarizing The Fool's excellent philosophy. I was a bit happy to hear three years is also worth targeting and not the usual five. Also, after reading the analysis in August's Fortune Magazine, we might all have to drop the mainsail in the not too distant future and just sail on the jib."
Now, I have to admit I don't regularly read Fortune Magazine, but my good friend, producer Rick Engdahl, has the power of the Google with him, and Rick, I see right now you are googling Fortune Magazine, August. What are you finding?
Rick Engdahl: I don't know about analysis, but the front cover is a man screaming and wearing a sign that says, "the end is near." The side notes say the U.S. economy will slow and the bull market will end, and here's what you must do now. A little doom and gloom there on that cover.
Gardner: I can kind of see it through the glass, and it looks dark. I see just kind of blacks and whites with Fortune red.
Engdahl: Blood red.
Gardner: Kind of an apocalyptic, I would say. Anyway, speaking of the apocalypse, Charles goes on. "Now, I'm not religious," he says, "but after many months of deciding on great companies I'd like to invest in, I'd like to add a No. 7 to our list of 'Hows'" and Charles says No. 7 is rest, like on the seventh day we rest.
Charles goes on. "Investing gets addictive, so I'd like to recommend having one day off per week when one should avoid investing at all possible costs. So seventh heaven? We are bombarded with info on a daily basis and it's just too easy to become hooked." That comes from Charles from Botswana. "Foolish wisdom," he closes, "spreads far and wide."
I think I'm just going to leave that one right there. I love that the seventh would be "rest" and it fits into the mnemonic because a lot of us can think of the seventh day as a day of rest; but it does kind of crack my six and six parallelism I was talking about earlier, so we'll just kind of leave that as a footnote for now, and something we'll be considering. But Charles, really inspired. Thank you, and thanks for writing and listening from half a world away!
Mailbag Item No. 4: This one comes from Aiden. Aiden, I loved your note. "My name is Aiden. I enjoy your company's podcasts. I've never emailed a podcast host before, so forgive me if my writing is disjointed. I wouldn't have written in if teenagers hadn't recently been encouraged to write [to] the RBI Podcast."
Aiden goes on. "Here's my Foolish story. It all started in my ninth-grade financial literacy class. My teacher was teaching us about stocks and investing. He was trying to explain to us what the benefits of making your money work for you were. He talked about compound interest and the like.
"Frankly," Aiden goes on, "it was boring. I didn't really get what the big deal was. Later, while I was doing stock research for the class, I stumbled upon an advertisement for The Motley Fool. Now to be honest, he says, "I thought it was a scam. People had told me my whole life that it was near impossible to beat the market, but I thought your logo looked cool, so I spent some time on your site.
"Long story short," he writes, "I found Market Foolery, and I enjoyed it, and after that I started listening to Industry Focus. By this time my financial literacy class was over, but my interest in investing in the economy was just beginning and slowly, without me even realizing it, I saw the point and fun of investing. I then started listening to Motley Fool Answers and Rule Breaker Investing. I most enjoy," he says, "the five-stock samplers."
He continues, and again, thank you so much for writing in. I love to hear from younger Fools. Awesome! He continues. "I wrote a book, albeit a small one, a while back. I had not known what to do with the revenue." So we're talking about a published author who made some money off his book at a young age. Well done!
He says, "After months of listening to The Fool podcasts [and with some encouragement from my teacher, that same financial literacy teacher whose class had ended], I decided to invest my money into the market for the long term. I have never looked back. That investment of money will definitely improve my life in the future and I would not have invested if it were not for The Motley Fool. Your company has most definitely enriched, amused, and entertained me. Feel free to read this letter out on your podcast, or not, but don't disclose my email." And I will not do that, Aiden. No one's getting your email. They're going to have to come after me.
He closes with this postscript. "Recently I listened to your poetry and prose episode." Yup, that was last month's mailbag. A really fun episode. He said, "I found A Psalm of Life by Henry Wadsworth Longfellow very clever," [yup, we read that out on the podcast]. "As I'm going back to school this week and starting a poetry unit in English class, I figured it would be a good time to check out a book of Longfellow poems from the local library. I like his poetry. I would not have discovered it without this podcast. I was inspired to write a small poem about The Foolish investing philosophy."
So here we go, from an already published writer. I don't know if this is Aiden's first poem or not. Aiden, by the way, is just a great Irish name and I also think of Yeats, and I think of poetry running through Ireland. But here goes Aiden.
TILL I AM OLD
Till I am old
I will buy and hold
It may seem quite boring
But what fun it is scoring
And not much have I ever sold.
The market may change and others may sell
But I have held on and I have done well.
Well, I guess, Aiden, if you did see that Fortune Magazine cover, you probably just ignored it as maybe I would have, as well, because while we might have a really bad market... It does happen from time to time. It could be this fall. It could be 2019 or 2028. It's going to happen, but it's never an end; and whether it's near or not, there is no end. Look at a graph of the Dow Jones Industrial Average over the last century and see which direction it goes over long periods of time. I'm glad that Aiden, at a young age, has already figured that out. Fool on, Aiden!
Is that the chief investment officer of The Motley Fool that I see coming in the studio right now? Yes, it is, and my friend Andy Cross is going to help me out with a number of the next few items.
Without further ado, my friend Andy Cross. Andy, when did you first come to The Motley Fool?
Andy Cross: 1996, David. And by the way, thanks for having me on! This is really great!
Gardner: My delight to have you, Andy! You have been with The Motley Fool just about as long as I have, and you've done such outstanding work across all of our services. You've helped advise our analysts. You are one of our great Fools and it's a delight for me to have you on Rule Breaker Investing this week.
Cross: Thank you!
Gardner: Andy, I have a bunch of questions from members and I just thought, "I could answer these, but I should have Andy in, because let's talk about them." And, really, I want to hear what you think more than what I think. I've shared one of these with you, so I think you're prepared, but the other ones, who knows what you're going to say. Let's get started!
Mailbag Item No. 5: Now we had an earlier correspondent, Andy, from Botswana. This time we're headed to New Zealand, so it's fun to think how global this podcast is becoming. Really, all Motley Fool podcasts because that's really our business.
Cross: That's right.
Gardner: But let's go to Josh in New Zealand who wrote this. "Hi, Dave. You recently replayed an interview with John McCain." Josh says, "Really enjoying the From the Vaults extras, by the way. In the interview, John states that the stock market return since the Second World War was around 5.5% and you appeared to agree with you him."
Let me pause it there for one sec. A reminder for those who may not have heard. With the dearly departed John McCain we did do an interview back in the day on The Motley Fool Radio Show and we ran that as an extra earlier this month. Anybody who's a McCain fan and wants to hear me mix it up with McCain -- it was an honor to do so.
And in that exchange, he quoted [this is from 20 years ago when we had this interview] how the stock market had an annualized return of like 5.5% since World War II. This is after the market had crashed. I don't think that I necessarily agreed with him. We just kept moving. But we're going to talk about this because, Andy, Josh is going to ask about this.
Josh goes, "That left me thinking. Hey, Dave, what happened to my other 4.5% as I've heard you say on the podcast that the market return was an average of 10%? That figure has always seemed optimistic to me," Josh writes, "as at that rate we could expect to double our money, roughly, every seven years." Josh goes, "I've also heard other people generally talk about 6-7% as the average stock market returns, so what is happening here?" Andy?
Cross: It's a great question, David, and it makes me reflect on just one of the beautiful charts we love. I know both you and I love to reflect on investing, which is long term. I'm talking 50-plus years of performance, whether it's the Dow Jones Industrial Index or whether it's the S&P 500, and [those charts] just seem to go continually up and to the right.
Gardner: Lower left, upper right any meaningful period of time, and not just in the United States, right Andy?
Cross: That's right. It's very global. Those are both U.S. indices, and it's very global in that the chart speaks to the global perception of investing. Now in between, over short periods, you do see some rocky times, like between 1999 and 2008 when we saw these two massive drawdowns in the market.
However, to the great question about annualized returns. The number 10% is about right. When you look back over 90 years of investing -- this is right from Prof. Aswath Damodaran from NYU -- his data shows 10% annualized returns over 90 years and a little bit more over 50 years; so that 10% number is the number that we typically state.
Now, when you start baking in and accounting for inflation, which runs about 2.5-3.5% annualized over time, as well as dividends, you can start to peel back that 10% a little bit. However, for the investor in us, if you just [bought] the index, and you had held it for 50 years or so, you would be returning that 10% annualized return.
Gardner: Right, and you and I both know that 50 years later, a dollar doesn't quite buy as much when inflation is eroding its value, but actually that's one of the reasons we do invest, so you can stay ahead of inflation.
Cross: David, that is so true, and not only stay ahead of inflation, but stay way ahead of inflation, especially compared to other vehicles that you can invest in. For example, the 10-year annualized bond return here in the United States over that same 90-year period is less than 5%. If you look at just the last 10 years, the return of that 10-year bond has been 3.5%. So compared to 8.5% for stocks just over the last decade, and again, going back 25, 50, or 100 years; you start looking at that 10-11% annualized return.
Gardner: So what I like that Josh is doing is he's asking that question and I think we're all realizing that it's all what starting data you're going to pick and what end date. We always like the biggest amount of data that you can get. 90 years. You just mentioned, though, that the market over the last 10 years is up about 8.5%. Well, doing my math, 2018 minus 10 equals the Great Recession of 2008-2009. It's still been a pretty great decade taken all in all, but that's a lower than historical rate because you're starting from 10 years ago, which was right before the market caved.
Cross: That starts in 2008 and the market in 2008 just totally cratered by more than 35%. Those drawdowns are very rare. Hopefully in our generation you won't see those kinds of returns in one year.
Gardner: They do call it the "Great Recession," and not the "Every Recession is Like This Recession."
Cross: That's right. And, David, just since you started The Motley Fool with Tom and since I've been working with you we did see two pretty significant drawdowns in 2000-2001 and 2008-2009.
Gardner: Exactly right. Thank you, Josh, for the question! I'm going to just keep saying 10%. It feels right to me, but there is inflation to consider and Josh is writing from New Zealand and not every country is going to have identical data. But these days you can generally google things and see rates of return in different countries over different time periods. Andy, is there a particular site that is accessible to our listeners where they could find some of this historic information?
Cross: I mentioned Prof. Damodaran's site at NYU. That is free. He just provides all kinds of data, but he has one particular page that you can download a file that has all that data, and it's very well organized and the data goes back to 1928.
Gardner: Yes. He is a professor at NYU. Serious investors know Aswath Damodaran's work, but for those who are hearing that for the first time and wondering how the heck do you google or spell Damodaran, off the top of my head I'm pretty sure it's D-A-M-O-D-A-R-A-N.
Cross: That's correct.
Gardner: I occasionally miss this once every three months or so. I am The Motley Fool's reigning spelling bee champion, so I don't even look up stuff. I just spell it. It's just other people see colors. Some people see numbers. I just see letters everywhere I look.
Cross: Have we actually had a spelling bee, here, at The Motley Fool?
Cross: A couple of times, maybe?
Gardner: I want to make it really clear, Andy. It sounds like you missed work that day?
Cross: I may have missed work.
Gardner: I did it! Tim Hansen was a finalist with me. And I think my friend Tom Madigan, as well. He's our editor at Rule Breakers and Stock Advisor. A bunch of us entered, but only one walked away. It's a battle royale out there. I don't want to talk too much about this every month or two on this podcast. I don't want to play myself up too much -- as often as I can -- as somebody who loves orthography, which is a really important word. If anybody doesn't know what that word means, you definitely need to look it up.
Cross: How do you spell it?
Gardner: O-R-T-H-O. Thank you, Rick! G-R-A-P-H-Y. OK. Mailbag Item No. 6. This one comes... My golly, are we going global. This is from Mahmud in Jeddah, Saudi Arabia. Thank you for writing in Mahmud! He said, "Hi David, love the show. I've been a listener for a while now.
"I recently subscribed to Stock Advisor to encourage my wife to start investing. She started two months ago, and she's already beating the market by around 5% thanks to you and Stock Advisor. My question is pretty straightforward, really." I'm going to ask it of you, Andy. "When do you add to a winner?" So Mahmoud goes on with a little bit more I'll give you here.
He said, "I add money to my stock account every month, but most of the time I'm attracted to the new, shiny stock that I don't own. I usually end up buying the stock of the moment as opposed to adding to my winners because I feel like I missed the boat with my winners." So his strategy for the past two years he closes with. He says, "It's worked pretty well. It's beating the market by around 15%," but he could have beaten it much more if he'd added to his NVIDIA. To his Square. I wish I owned Square. To his Amazon. I do own that one.
"What I'm thinking of doing now," Mahmoud closes, "is every month I'm going to add to the stock that has increased by 20% within the last three months. Is this strategy good and if not, when do you add to your winners?" Andy Cross, take a shot.
Cross: Well, I love the attitude of adding to your winners. I mean, just looking back at my investing career, I think that some of the biggest mistakes I made was not only did I not add to my winners, but I actually added to my weeds in my garden as opposed to my flowers.
Gardner: Threw good money after bad.
Cross: It's an evolutionary process and I love the idea of adding to your winners. One thing I love to think about is building out positions over time. You don't have to buy your entire position at one time. If David recommends a company in Rule Breakers or in Stock Advisor, don't feel like you have to buy all of your allocation of your portfolio at that time. Buy a little bit here. We have talked in the past about buying thirds. I love that approach.
And set the commitment to buy, so regardless of whether the price has moved dramatically up or down, buy in thirds.
Gardner: And just to give a little bit more, because I know some of our longtime Fools will know what Andy means when saying buying in thirds, but for those who don't the idea is let's just pretend that you ultimately want to put, let's say, $3,000 in a stock position, but you're feeling a little timid. Maybe it's been on a big run. It's hard to pull the trigger.
What we've suggested in the past at The Motley Fool... Definitely google "buying in thirds." You're going to find your way to Fool.com pretty quickly. Take $1,000 of those $3,000 and just buy right now. It doesn't matter where the stock is. Whether it's up or down. Don't even look at today where it traded. Just get in the game with one-third of your money.
Psychologically you're going to win either way. If the stock goes up from there, this is what I'd say. "Man, am I glad that I got something in there because otherwise I was going to wait and look it's already up and now I'm making money." On the hand, Andy, if it goes down after you bought your first thousand, then what are you thinking?
Cross: Then you're glad you didn't commit all of the $3,000 right away.
Gardner: And so we win either way.
Cross: That's right, but [it's about] having the commitment and that plan to invest. Years of investing, David, have told us that the best companies continue to win and they will continue to win going forward, so you should not be afraid to commit to those winners.
The thing you do want to be careful about, David, is your allocation in your total portfolio. Just thinking about how much of a stock that you want in your individual portfolio to make up your individual portfolio. You might set limits about that. It could be 10%. It could be 20%. It might be 5%. Just understanding the boundaries of your allocation guidance when you are thinking about adding to your winners because, by definition, they are making up a larger percentage of your portfolio.
Gardner: Andy, is it fair to say you agree with me this week that winners win?
Cross: I think I would.
Gardner: Winners win?
Cross: I don't think, David. I know winners win!
Gardner: Winners win. Well, I've got at least one more mailbag item with you Andy, but I just want to make sure that we finished it out there, with Mahmoud. He specifically said he's going to wait to add to a stock that had increased by 20% within the last three months. Now is that a strategy that you specifically would use? Is it directionally right? What do you think?
Cross: I think it is directionally right, David; but in a short amount of time, some of your favorite stocks, some of your winners may be up 4%. The stock market may be down 10%.
Gardner: Right. You may not even find a stock that went up 20% in the last three months if we have a bad three months.
Cross: That's right. Now, it's been a very good couple of years, here, for us investing, so hopefully people have been adding to their winners. I think directionally you want to understand and be committed to adding to your winners, because ultimately those are the ones that are going to drive the biggest gains in your overall portfolio. You want to have money set aside to be able to invest in those.
Gardner: One final thought for you, Mahmoud. You could take the money that you're ready to invest... And great job saving. Great job you and your wife having regular money to invest. That's the hardest trick of all, just being a saver in this world, so you're doing that.
You could split it in half. Every month, every two weeks [whatever your paycheck, whenever it comes], you could say, "Half is going to go into a new, shiny stock," and I love those, too, "and half is going to go into a company that's performing well that we think is doing great things in this world." Now that's arbitrary. There's no one size fits all, and that's why Andy and I are always cautious about our language, because just as we have writers this month from Botswana, New Zealand, Saudi Arabia, and yeah, the good old U.S. of A, there are many different contexts out there.
So one of the tricks is you've got to know your context. So listen to the global thing we're saying but live and act locally in a way that makes the most sense for you.
Mailbag Item No. 7: I do believe this is our last mailbag item for this month's podcast. "Dear Dave," Greg Rowe writes, "just wanted to write and say thank you. I recently completed 30 years in the Navy with the last 19 in the Reserves. I started investing, albeit very conservatively, back in the mid-nineties. I plugged along from that time until about 2014 just investing in various mutual funds.
"I remember making a call to my investment advisor in 2008 as things turned south..." We talked about that Andy. "... lamenting that my best investment was a 529 account in Virginia that had locked in eight semesters of college for my son. As we came out of the recession, another friend and I discussed the best ways to invest for those without the time and expertise to do a lot. His advice, "You can think Bogle, etc. Go with funds. This sort of a thing."
"So after taking the gentleman's C," Greg writes as you call it, "for a few years I wondered if I could do better. I was intrigued by The Motley Fool more than any other investment service out there. Buy stocks?" Greg writes, "Wow, very risky. There are a bazillion of stocks. How do I know what to buy? How much time and effort do I need to invest to do better than the market?"
So Greg signed up for The Fool in 2014 and started his ride.
He goes on. "I've listened to dozens of RBI podcasts. Heard you explain my mistakes to me, even as I did them." Greg said, "I bought Netflix at $55 then sold within a year when it dropped, only to rebuy later and thankfully reap the rewards of patience with a great, yet volatile company. Invest in a business, not a stock. Stocks go down faster than they go up but go up more than they go down."
I'm going to skip a little lower in Greg's wonderful note. "What I find interesting," he writes; and Andy, this is where I'm welcoming you into the close of this week's podcast. "What I find interesting," Greg says, "is of the stocks I bought based on The Motley Fool's recommendations, many are very poorly rated by my brokerage..." [Hey, this is my brokerage, too.] "... Charles Schwab, using their equity rating scorecard."
Greg says, "I'm so thankful that I've educated myself using your services and recommendations Stock Advisor, Rule Breakers, Rule Breaker Investing podcasts, to buy companies, not stock symbols because Schwab's equity ratings, based on an aggregated score using a valuation grade, a quality grade, and a sentiment grade based on a series of financial metrics from the past, etc. all look pretty much," Greg says, "horrible when I put The Motley Fool stocks through the Schwab equity ratings."
He said, "For example, our pick of Okta in January [OKTA], which we gave a relatively high 12 risk rating to rationalize our comments based on what the business did and how it was led [not just metrics]. Schwab's scorecard grade for Okta is an F." An F, Andy. That's what Greg says, anyway. "With a strongly underperformed, qualitative notation." However, since he purchased it just after our recommendation, it's gained over 100% in just over eight months. Which, by the way, I wish we could do that every time. It's rare for us, but that is real. That is real. With an F, I guess, riding all the way up. Did it get even worse when it went up 50%? Is it now even more of an F? An F minus? I don't know how those work.
Paycom [PAYC]... I think you know this one well, Andy, is an F. He's gained nearly 120% on that one. Match Group, which is a four-bagger is a D. Netflix is a D. Nearly a four-bagger for him, as well. I could keep going. NVIDIA is a C. It's a five-bagger for him.
His point is, and he says it at the end, that the insights that we provide are more aggressive and a more insightful vision into what constitutes great businesses has enabled him [I'm really happy he says this] to get smarter, richer, and have fun. It sounds like The Motley Fool's new purpose. He's related his insights to his 20-year-old son. Andy Cross, what is your take on the whole Schwab equity ratings or just equity ratings in general, and how they roll with Foolishness?
Cross: We're having a little fun with Schwab, but I think it goes across a lot of the brokerage houses and other investment...
Gardner: I found that Morningstar can be very conservative on some of the stocks that you and I favor most as an example. It's not just Schwab...
Cross: Exactly. There's a lot that goes into stock recommendations. We spend a lot of time thinking about our principles of business orientation, people first, market opportunities, and importantly, David, which I think a lot of these firms don't particularly think about, which is timeline. Our timeline of willingness to hold our stocks and be patient through the ups and downs...
Gardner: This is so important.
Cross: And when I just look at the definition of how Schwab bases their equity ratings, they base them straight from their site fundamentals, valuation, momentum and risk. There's a lot to those categories, and they may think very differently than what we think. We're very clear on our theses when we write, whether it's in Stock Advisor or Rule Breakers or Supernova or through any of our other services or guidelines on the businesses and the stocks, and we just look at the world differently than so many other places and it's benefited us for 25 years.
Gardner: I suppose by playing a game differently than the way everybody else is playing it, we have a better chance, often, of winning because people aren't trying to do what we're doing.
Cross: That's absolutely true. When you think about the turnover, which is the selling of stocks in our services from Stock Advisor all the way to Tom at the Everlasting Portfolio, we sell so very rarely, and that's so different when your average active mutual fund manager is turning over their portfolio once every eight or nine months.
Gardner: All right. Well, Andy, thank you very much for your insights throughout the last 15 minutes or so of this show! And Greg Rowe, thank you for your service! Thirty years in the Navy sounds pretty good to me. And thank you to our correspondents far and wide! I didn't even get to Nick West from Canada. We ran out of time, Nick. I love the story about investing with your son. Maybe we'll cover that in the future.
But this is another one for the books -- Mailbag. Thank you, again, to my producer, Rick Engdahl! Thank you to my guests, Greg Robleto and Andy Cross! And thank you -- you -- whoever you are, for suffering Fools gladly this week!
Next week we're going to kick it off with October. Not even sure what I'm going to do to kick off October. I know one thing. We're going to be trying to make you smarter, happier, and richer.
In the meantime, Fool on!
As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com.